LAWRIE WILLIAMS: Lassonde preaches $15-20,000 gold price
Gold doyen Pierre Lassonde, now semi-retired, has had a remarkable track record in the gold space having co-founded Franco Nevada – the pre-eminent gold royalty company - and one time President of Newmont Mining, currently the world’s No.1 gold miner in terms of annual production. His views are definitely worth listening to and once again, in an interview with Kitco.com, he forecasts that the gold price could reach $15,000 or $20,000, although he does not put a date on when these sterling levels might be achievable. While we do not feel that gold will reach these exalted levels in the short to medium term, we do admit that in the ultra long term such peaks may be achievable.
Lassonde has, for many years, predicted that the gold price will eventually achieve parity with the Dow Jones Industrial Average (currently at around 28,000), suggesting a huge increase in the gold price coupled with a sharp reduction in the DJIA index. This is a pattern we would concur with, although something that could take several years to come about. Indeed if it does we suspect it will be a case of the DJIA Index coming back drastically which, in turn would likely lead to a huge boost in safe haven investment in gold and thus in the gold price itself. (Incidentally, should the gold price reach such an advanced level that would suggest a silver price of anything up to $250 - a target which would bring considerable heart to silver bulls.)
Indeed the Lassonde prediction on Dow and gold price parity seems more likely to this observer to come about with an apocalyptic crash in U.S. equities markets on perhaps a similar scale to that which happened during the Great Depression of 1929/1930s when the Dow lost over 89% over a 2-3 year period of market meltdowns. A similar fall could see parity achieved at around $3,000 an ounce, but U.S. investors will be praying that this doesn’t happen. Indeed even in our most pessimistic predictions on the Dow, we see this as unlikely, but not impossible!
Another point which came up in the Lassonde interview – and one which we would agree with wholeheartedly – is that the gold mining companies are currently achieving almost ‘unbelievable’ margins – even at the current gold price, and with the latter probably rising, these margins are likely to increase further. The position is further enhanced by low current energy prices. Lassonde believes that this will filter through in a resurrection of mineral exploration activity by gold juniors, but with the lead time from deposit discovery to new mine development, this is not likely to filter through to any increase in global gold production for many years to come.
Lassonde also reckons that the high margins, and thus higher profits, are likely to lead to growing acquisitions by the senior miners – and, we would add – lead to higher dividends which will also enhance the likely gains in gold mining stock prices.
So while we see Lassonde’s gold price predictions as being somewhat over-optimistic as far as the foreseeable future is concerned, perhaps they may be achievable in the ultra-long term, (say 10 years or more). In our view the theory that the gold price may move closer to parity with the Dow may be worth considering – but not necessarily at the kinds of levels Lassonde suggests. We do think the Dow may come down sharply given the continuing impact in the U.S. of the coronavirus pandemic and its continuing adverse effects on the nation’s economy. Currently some see the strengths in U.S. equity markets as being hugely over-egged, with the coronavirus effects on the economy leading to an enormous fall in corporate profits and equity valuations once the realisation truly sinks in. The growth in stock prices seems untenable in the face of what some have described as the worst disaster for the U.S. economy ever seen.
However, we see Lassonde’s overall view that gold prices are on the up as valid. It is only the size, and possibly the speed, of the likely uptick which we see as in doubt. His comments on the unbelievable margins being achieved by the gold mining companies are indeed accurate, though, as we have pointed out before, which makes investment in gold and gold equities as being a particularly good choice at the moment.
16 Sep 2020